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Incentives for Investment in Telecommunications Services in the EU and Eastern European Markets outside the EU

Seminar on Economic and Market Analysis for CEE and Baltic States

Prague, 10 September 2003

Ursula Harnischfeger

Content

Introduction: Incentives for investment in telecommunications1.

Setting investment incentives in regulatory regime2.

The operators`s perspective3.

Summary and conclusions4.

1. IntroductionThere is global competition for foreign direct investment

Investment only takes place when the potential benefits outweigh the costs

Foreign direct investment is very flexible and a typical investor will consider the following questions before investing:

Return on investment ?

What is my strategic fit ?

What are the national rules and ownership rights?

What is the market size ?

Is the political environment stable ?

What is the market potential ?

What are my risks ?

How is the economic and regulatory environment ?

1. IntroductionThere are investment risks that can be influenced by regulators and some that can not be changed

…regulatory authorities will influence the regulatory environment and sector specific regulation risks for investors

Return on investment ? Financials Financials

What is my strategic fit ? Investor’s strategy Investor’s strategy

National rules and ownership rights? National Governments National policy

What is the market size ? Population and Market Size Country specific

Is the political environment stable ? National Governments National policy

What is the market potential ? Expected growth Industry and country

What are my risks ? Specific risks Investors

Investors`questions Responsibilities / Influence

Interest for regulators

Economic and regulatory environment ? Regulation Regulatory authority

1. IntroductionThe role of the regulator

… the presentation will build upon presentation on Role of Regulators

Topic of presentation will focus on regulatory framework = investment factors that can be influenced by regulators

Content





Incumbents loss of market share (%) in the long distance market after liberalisation

The Regulatory Regime has significant impact on the degree and speed of the incumbent‘s market share loss after liberalisation

75%

80%

85%

90%

95%

100%

1 2 3 4 5Number of years after liberalisation

BT (UK)

Telia (Sweden)

Telstra (Australia)

NTT (Japan)

TCNZ (New Zealand)DTAG (Germany)

Source: Operators’ information

2. Setting investment incentives in regulatory regimeThe importance of the regulatory regime for investors

2. Setting investment incentives in regulatory regimeThe importance of the regulatory regime for investors

Successful positioning in liberalized telecommunication markets and future revenues are highly dependent upon the regulatory framework

More real competition and fully independent regulator will become reality in CEE and Baltic Countries

Operators will have similar experiences as in Western Europe

In order to determine an optimal strategy in line with regulation, it is important to understand the regulatory framework and to interpret possible consequences of the various regulatory parameters from an investor’s point of view

Incumbents will continue to have to do what other incumbents had to do

2. Operators need stable regulatory frameworksInvestment is threatened without a stable, reliable and predictable regulatory environment

Operators need to know that, if they make new investments those investments will not be challenged by inappropriate regulations

New entrants need certainty in the regulatory environment they will be working in when drawing up their businesses cases

Incumbents need certainty regarding their regulatory obligations

2. Setting investment incentives in regulatory regimeInvesting in telecommunications market

The regulatory regime may also attract different types of investments which do not require long-term investment. Example: Service based based competition re-selling etc.

Investing in telecommunications infrastructure is a long term investment

Return on investment for telecommunications infrastructure takes time

It is basically a political and economic consideration of the regulatory and the ministries concerned which type of competition (or what kind of investment) is likely to occur

The EU approach favours Service based competition through regulation (Carrier Preselection, Carrrier Selection, Local Loop Unbundling etc.)

2. Setting investment incentives in regulatory regimeWhat can regulators do in order to attract direct foreign investment?

Regulators should provide a fair level playing field for all licensed operators

Regulators should act truly independent

Regulators should conduct public consultations with operators

Regulators should regulate in open and transparent manner

The legislative framework should be kept to necessary minimum

Regulators’ role is to protect competition and not competitors

Content



The operators`s perspectives3.


Strategy to become fit in the pre-deregulation power struggle

■ How will the market develop in all parts of the value chain (Access Regulation) ?

■ What kind of competitors will occur and where will they attack (Licensing/ Authorisation) ?

■ What market strategy and marketing mix fits best to the specific circumstances?

■ What is the most adequate regulatory position towards the regulator or competitors?

■ Which regulatory issues are most crucial for corporate strategy?

■ What is the most suitable wholesale strategy?

■ How can financials be optimized?

■ What kind of organizational change is necessary?

■ What regulatory expertise needs to be developed?

RegulatoryStrategy

Key Parameters for

Operators

Market &Competition

Internal Structures

& Processes

3. The Operators’ perspectiveCritical Issues for Operators in Liberalisation Process

3. Regulatory Framework: The Operators’ perspectiveCritical Issues for implementing the regulatory framework

With the liberalization of the telecommunications markets the National Regulatory Authority (NRA) develops a framework to promote fair competition and to ensure quality of service.

Such a framework is likely to address the following key issues with impact on investment plans:

RegulatoryStrategy

Key Parameters for

Incumbents

Market &Competition

Internal Structures

& Processes

RegulatoryStrategy

Key Parameters for

Incumbents

Market &Competition

Internal Structures

& Processes

General Framework

Regulatory Objective and Scope Independence of NRA Procedures and transparency Numbering and number portabilityStandardization

Authorization

LicensingAuthorization and RegistrationFrequency Allocation, Assignment and Monitoring

Rights and Obligations

InterconnectionUnbundling of the Local Loop (ULL)Price RegulationUniversal Service ObligationQuality of Service

Competition

Discriminatory BehaviorSignificant Market PowerJoint Ventures

Implications for Incumbent‘s and new entrants Strategy

RegulatoryStrategy

Key Parameters for

Incumbents

Market &Competition

Internal Structures

& Processes

RegulatoryStrategy

Key Parameters for

Incumbents

Market &Competition

Internal Structures

& Processes

Incumbent‘s Obligations

Other Requirements

Interconnection Offer

Unbundling of the Local Loop (ULL) Offer

Regulated Pricing and Rebalancing Strategy

Universal Service Obligation

Quality of Service

Licensing

Frequency Allocation, Assignment and Monitoring

Procedures and transparency

Numbering and number portability

Third Party Billing

Discriminatory Behavior

Significant Market Power

Joint Ventures

Sector Strategy and

Reform

Pricing + Rebalancing Strategy

Interconnect Reference

Interconnect Offer (RIO)

Key issues

3. Regulatory Framework: The Operators’ perspectiveImplications for Incumbents’ strategy

3. The Operators’ perspective on interconnection and Reference Interconnection Offer (RIO) Implications of interconnection policy for Incumbents’ strategy

Interconnection Services will determine the core of the incumbent’s wholesale portfolio at the beginning of market liberalization

The interconnection strategy will strongly influence the development of competition, and consequently the incumbent’s future revenues

The Incumbent will be obliged to develop a Reference Interconnection Offer (RIO) dealing with the commercial, technical and operational conditions of the specific service

Prior to the development of the RIO, the incumbent will need to determine its strategy on interconnection services which is most advantageous compared to the applicable regulatory regime and which guarantees profitability

RegulatoryStrategy

Key Parameters for

Incumbents

Market &Competition

Internal Structures

& Processes

RegulatoryStrategy

Key Parameters for

Incumbents

Market &Competition

Internal Structures

& Processes

3. The Operators’ perspective on pricingImplications of Pricing and Rebalancing Strategy for Incumbents’ strategy

With the introduction of liberalization, the incumbent has to develop a pricing strategy which complies with the regulatory framework.The aim of price regulation is to mimic efficient competition with obligation for incumbent to set prices which are:

■ cost-oriented (Tariff Rebalancing) and transparent, ■ non-discriminatory, ■ fair and objective

Price regulation limits pricing flexibility of Incumbents and can be implemented in the following ways:

■ Ex ante regulation (proof of cost-orientation, price cap regulation)■ Ex post regulation (non-discriminatory behavior, prevent predatory pricing )

To reduce risk that prices are not accepted by the regulator, the incumbent should:

■ develop a consistent pricing strategy ■ use benchmarks to verify whether the derived cost-oriented prices are

appropriate and likely to be accepted by the regulator.

RegulatoryStrategy

Key Parameters for

Incumbents

Market &Competition

Internal Structures

& Processes

RegulatoryStrategy

Key Parameters for

Incumbents

Market &Competition

Internal Structures

& Processes

RegulatoryStrategy

Key Parameters for

Incumbents

Market &Competition

Internal Structures

& Processes

RegulatoryStrategy

Key Parameters for

Incumbents

Market &Competition

Internal Structures

& Processes

3. The Operators’ perspective: Failed investments.......What should regulators do if operator fail/ go bankrupt?

The policy of the regulatory authorities in Western Europe and the USA can be described as “stand back” policy whereby the regulatory authority monitors the development of the market but does not try to protect a single competitor from the danger of bankruptcy

The analysis of regulatory authorities in the USA, the UK and Germany shows that regulatory authorities did not intervene to protect telecommunications companies from going into administration or bankruptcy

It is recommendable that the regulator should take the role of a referee monitoring and ensuring a fair level playing field for competition telecommunications and internet market without unduly interfering if a single competitor appears to have made a wrong investment

Content





4. Summary and conclusionsThe importance of the regulatory regime for investors

Regulators have an active role in shaping the regulatory framework in order to attract direct investment

The most important role for the regulator is to provide a fair level playing field for all telecommunications operators

Strong regulators are needed to ensure competition and investment

Regulators should learn from the experiences of Western Europeanregulation

Regulators should be open, transparent and reliable to encourage investment

Regulators should regulate the market not protect single operators

Your Contact

Ursula Harnischfeger Detecon International GmbH

Regulatory Affairs

Oberkasseler Str. 253227 Bonn (Germany)

Phone: +49 228 700 1519Mobile: +49 160 365 55 17

e-Mail: [email protected]

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